Edited version of your written advice

Authorisation Number: 1051214876004

Date of advice: 27 April 2017

Ruling

Subject: Genuine Redundancy

Question

Is any part of the payments received from a redundancy trust considered genuine redundancy payments under section 83-175 of the Income Tax Assessment Act 1997 (ITAA1997)?

Answer

No.

This ruling applies for the following periods

Year Ending June 2016.

Year Ending June 2015.

The scheme commenced on

1 July 2014.

Relevant facts and circumstances

1. You are under preservation age.

2. You were employed by your employer from the 2007-08 financial year for more than 5 years.

3. In 2007, you signed up to a redundancy trust account known as the Incolink Severance Account, specifically, The Redundancy Payment Approved Worker Entitlement Fund 1 (the Fund).

4. The Fund, as detailed in its Trust Deed (the Deed), currently operates as follows:

a) Member employers make monthly contributions to the Fund based on the number of workers they had each week at specific work sites for that month multiplied by a specific contribution per worker for that week. The Fund is then required to credit weekly contributions to an account for each worker (a 'Worker’s Account)

b) When a worker’s employment is terminated for any reason the employer notifies the Fund and a claim is made for a payment from the Fund. The Trustee must pay the Worker a redundancy benefit not exceeding the maximum initial payment benefit as prescribed from time to time in the Redundancy Pay Agreement.

c) If the worker remains totally unemployed for at least 4 weeks then the remainder of their account balance is paid. Alternatively, if the person remains out of the building industry for a period of 39 weeks (but may be employed elsewhere) the remainder of their account balance is paid.

d) The Fund makes a payment to a worker after processing their claim.

5. Payments made from the Fund are currently treated as employment termination payments for tax purposes.

6. In a particular financial year, you were terminated from your employment. Your employer stated that your termination was due to a genuine redundancy.

7. In that same financial year, you received your initial payment benefit from your Fund of with tax withheld of 32%.

8. In the following financial year, and over 4 weeks after your received your initial payment, you received the balance of your account balance of your Fund with tax withheld of 32%.

9. You stated that your funds were held in an Incolink Severance Account. The Genuine Redundancy Account (GRA) later became available but you were not able to change your account to the GRA.

10. In the subsequent financial year, your Tax Agent stated that the amount that would have been paid from the GRA would have also been exactly the same amount as what you have already received from your Severance account.

11. The GRA currently operates as follows:

_ existing workers are provided the ability to irrevocably elect to change the status of their Worker’s Account to a GRA. This takes place 6 months after notice is given to Incolink.

12. A worker will only be entitled to access their GRA on termination of employment if Incolink is satisfied that the termination of employment was a result of the worker’s position being made genuinely redundant.

13. In the same subsequent financial year , we received a private ruling request for your initial payment and account balance payment to be treated as genuine redundancy payments as defined under section 83-175 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175 (1).

Income Tax Assessment Act 1997 Subsection 83-175 (2).

Income Tax Assessment Act 1997 Subsection 83-175 (3).

Income Tax Assessment Act 1997 Subsection 83-175 (4).

Income Tax Assessment Act 1997 Section 83-170.

Taxation Administration Act 1953 Subsection Sch 1-357-105(2).

Reasons for decision

Summary

14. No part of the payments received from the redundancy trust are considered genuine redundancy payments because they do not exceed the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

Detailed reasoning

Genuine redundancy payment (GRP)

15. Section 83-170 of the ITAA 1997 provides concessional treatment for a genuine redundancy payment in that the amount of the payment calculated in accordance with the formula in subsection 83-170(3) is tax-free.

16. To determine if any part of a payment made to an employee constitutes a genuine redundancy payment (GRP), all the conditions in section 83-175 of the ITAA 1997 will need to be satisfied.

17. Section 83-175 of the ITAA 1997 states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee’s position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee’s employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm’s length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm’s length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

18. The Commissioner has issued Taxation Ruling TR 2009/2, Income Tax: genuine redundancy payments. The Ruling, which is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

19. In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

_ The payment being tested must be received in consequence of an employee’s termination.

_ That termination must involve an employee being dismissed from employment.

_ That dismissal must be caused by the redundancy of the employee’s position.

_ The redundancy payment must be made genuinely because of a redundancy.

Exceeds the amount that could reasonably be expected in consequence of voluntary termination

20. Further to the above subsection 83-175(1) of the ITAA 1997 also includes a second condition, highlighted below, which shows:

A genuine redundancy payment is so much of a payment received by an employee …[which] exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

21. Therefore, to satisfy subsection 83-17(1) of the ITAA 1997, even though the four components stated above may be satisfied, it must also be demonstrated that the payment is, or includes, an amount which exceeds what the employee could reasonably be expected to receive in consequence of the voluntary termination of his employment.

22. The amount that exceeds what an employee could reasonably be expected to receive in consequence of the voluntary termination of his or her employment is discussed in TR 2009/2, particularly in the following paragraphs from that ruling:

57. Assuming that the genuine redundancy payment requirements in section 83-175 are satisfied in relation to a payment, subsection 83-175(1) identifies that part of the payment that is specifically attributable to the fact that employment has been terminated because of redundancy. Only this part of the payment can receive tax-free treatment.

58. Subsection 83-175(1) identifies the amount attributable to redundancy by deducting the amount that could reasonably be expected to be received by the employee if he or she had voluntarily terminated employment at the time of being dismissed. In this Ruling, this is referred to as the voluntary termination element of a redundancy payment.

59. Apart from this hypothetical change in circumstances to a voluntary termination instead of a dismissal caused by redundancy, all other circumstances surrounding the termination are assumed to be the same.

23. Class Ruling 2010/40 Income Tax: payments from Redundancy Payment Central Fund No 2 and Redundancy Payment Approved Worker Entitlement Fund 2 contains an example of the consideration given to the application of the second condition of subsection 83-175(1) of the ITAA 1997. In particular whether Genuine Redundancy Accounts (GRAs), would be treated as GRP’s.

24. In this case, the applicant received payments from the Fund upon termination of their employment. The Trust deed states at 9.1 and 9.1A that the payment is due when the worker is terminated for any reason.

25. Though the payments the applicant received relates to circumstances of genuine redundancy, it was stated in paragraphs 107 and 108 of CR 2010/40:

107. The amount that accrues to a particular worker (and therefore, become s payable from a particular account [this could be a 'Worker’s Account’ or GRA]) is in no way dependent on the nature of the termination of employment or the account to which the amounts are credited. The worker’s entitlement is always to the balance of the account. There is no additional amount as contemplated by paragraphs 61 to 63 of TR 2009/2.

26. It is assumed that the applicant was dismissed due to genuine redundancy by their employer. However, the relevant Trust Deed compels the Trustee to make the two payments regardless if the applicant voluntarily resigned or was made redundant.

27. If the applicant had voluntarily resigned on the same date that they were terminated, they would receive exactly the same payment as what they actually received.

28. The applicant’s Tax Agent stated that the applicant would have received payments of the initial payout and the balance payout if they had successfully switched to a GRA. This is the same amount that was paid from the Severance account.

29. Accordingly, as the payment was not in excess of what the applicant could have expected to receive had they voluntarily terminated employment, the second condition in subsection 83-175(1) of the ITAA 1997 was not satisfied.

30. It is stated in the Trust Deed that an election must be made in writing for the applicant account to be transferred into a GRA.

31. It is recognised that the applicant’s particular circumstances may have caused them to overlook or not be aware of the election requirement to transfer their balance into a GRA.

32. However, as the election was ultimately never made, we cannot consider the applicant’s payment as if it were made from the GRA account.

33. Consequently, as one of the conditions in section 83-175 of the ITAA 1997 was not satisfied, no part of the payment received could be treated as a GRP. Therefore, the tax-free treatment of GRPs under section 170 of the ITAA 1997 is not available in respect of the payments.

34. Condition (1) is not satisfied. Therefore, it is not required to examine the remaining conditions.

Conclusion

35. The two payments received by the applicant from Incolink were taxed correctly as Employment Termination Payments.

Further issues for you to consider

Employment Termination Payments for persons under preservation age are taxed at 32%.

ATO view documents

CR 2012/40 Income tax: payments from Redundancy Central Fund 2 and Redundancy Payment Approved Worker Entitlement Fund 2.

TR 2009/2 Income tax: genuine redundancy payments.

Other references